A Startup is an entrepreneurial venture that seeks to either invest its own money or have the assistance of third parties in monetizing a product or service. Despite the high failure rate, the most valuable companies for 2020 are startups such as Amazon, Apple and Google, Microsoft, Tesla, Uber, and Microsoft.
In the past ten years, the startup investment community has seen a lot of growth. Despite the fact that the construction industry was struggling to innovate and the margins for startup investment were very low, 2020 saw over $1.3 billion USD in new business models.
The previous record was set in 2018, with more than $1.8 million USD invested. It’s also the fourth consecutive year that the number of funding rounds has exceeded 100.
What are the stages of a start-up?
Let’s break down startups into six phases that differentiate the level of advanced startups on the path to monetization and becoming market-leading solutions.
Startups only exist and make sense if they solve at least one problem in the industry where they operate. Although there is a high failure rate, you can still measure success in any of these six stages.
Each phase can offer different types of financing, but all have main players who, in some way, support the growth of the business model.
The stages of a startup
- Pre-Seed stage
- Seed Stage
- Early Stage
- Growth Stage
- Expansion phase
- Exit phase
The phase is critical for identifying a problem in the niche market where the startup wishes to operate. It will determine the success or failure in the future of the solution.
It’s not enough to just notice the pain point. It’s important to determine the severity or intensity of the problem and to estimate the potential cost.
You should ask yourself these questions as an entrepreneur:
- Is my solution really the best way to solve the problem?
- Is my solution likely to affect other industry pain points by increasing their awareness and/or decreasing acceptance?
- Does my solution look similar to one already in place?
It is a great way to understand the pain points of potential customers.
This analysis is done in the pre-seed stage, also known as the idea phase. All it takes to get an idea and convince someone else to do it with you. This is the time to establish the legal foundation for the project and make them part of the Partner Act.
Validating the business model is what is most important in the seed phase. These decisions include deciding the startup’s methodology. This phase aims to create the startup’s first materializations. This is possible by developing prototypes. These are small experiments that validate the original idea upon which a startup is built.
Its purpose is to validate the initial value hypothesis. A prototype in the early stages of development doesn’t have to be functional or viable. This is not to be confused with an MVP (Minimum Viable Products), which must be functional and viable.
You should make many iterations before you finally find the perfect solution. Validation of an Idea involves the collection of evidence through experimentation to enable quick, informed, and risk-free decision-making.
Some hypotheses and initial assumptions should also be presented. After a verification process and a criterion for satisfaction, it will be either confirmed or rejected. The need to pivot toward a new assumption is reflected in the rejection or non-validation of the initial hypothesis.
The forms of financing are primarily focused on the bootstrapping dynamic, which is a business model that relies solely on the resources of the entrepreneurs. Revenue generated by the company also plays a major role. Public aid, business angels, and the participation of incubators become support agencies for the incipient projects. This term is very common in this ecosystem: FFF.
The Early Stage
This is the beginning of a phase where the idea continues to develop until it is ready for launch. Now is the time for a test. This will not be the final version. It will be tested to ensure it is a Minimum Viable Product (MVP).
The minimum viable model is a model without all its functions. This makes the test simpler. The first version is released, and the data and results are collected. It should be reviewed after its release to determine if it meets customers’ needs. If not, new versions are created to try and satisfy them.
Startups at this stage usually have a team regardless of their size, provided they cover the necessary areas and perform the initial tasks. Even if your business model is not yet complete, this is the time to create one.
This is a crucial phase and will allow you to fully comprehend the impact you have on the scenario you prepared in previous phases. It is about testing the terrain, expanding your audience, and being in close contact with customers.
Venture Capitals and Accelerators are also available at this stage. These entities, which help to test new business models and provide customers access, not only support emerging ideas but also offer additional value. Crowdfundingbetween the interests is another dynamic that is gaining more traction.
Stage of Growth
If a startup’s a product/service reaches this stage, it will be met with strong market demand. This means that there’ll be an increase in new customers, recurring customers, and billing. This is where profitability is key. This is when the team grows and recruits.
This stage has the highest rate of failure. This does not mean the product or service will be fixed. You may have to adapt it to reach a new audience, meet new needs, or take up new areas that were not planned.
This stage is crucial for funding, whether to fund the necessary changes or continue on to the next step. The agents and dynamics mentioned above are not the only important aspects of this stage. Corporate Venture Capitals and Venture Capitals play a central role. They have two objectives: the first is financial, which means they seek to return capital, while the second is strategic and focuses on creating strategic value for the company.
Private equity is another name for institutions that invest in private companies with high growth potential. In return, they can control a portion of the company’s shares or a portion of the company.
Faced with a more widespread definition of the term startup, a scaleup demonstrates a proven business model that allows it to consider more ambitious goals, for example, internationalization, expansion to other sectors or hiring new professionals.
Companies that have made significant progress in their business model execution will move on to this phase. They consolidate their revenue growth and employee growth.
According to the Scaleup Institute of the United Kingdom (OCDE), a scaleup company must have experienced a growth rate of at least 20% in the last three years, either in terms of the number of employees or turnover (billing).
Expanding markets is crucial to business continuity and growth. International expansion is generally more desirable if the market is larger and more ambitious. However, expansion can occur in the same geographic area, but in different segments, including new products or services that fall under the same umbrella.
It is common to make agreements with large companies and obtain financing for their infrastructure in order to expand the business model, both geographically, and among established customers.
Startups may not be required to go through this phase. Some business models are designed to be a long-term, high-value companies. It is quite common for the exit to be by selling the startup. However, this stage is not common for many startups. Those who do reach it are known for their strength, potential, and ability to continue growing.
There are many ways to achieve this output, but three options stand out: the sale of founders’ shares, acquisition by another company, or an Initial Public Offer (IPO).